L.A. Firms About To Be Struck by Major Cost Hikes.

For Michael Murphy, president of Santa Clarita-based Aquafine Corp., these were supposed to be the good times.

As his ultraviolet water treatment business has grown during this economic boom, he just moved his company into a new 110,000-square-foot building, four times the size of its previous quarters.

But Murphy feels more like he's under siege. That's because, come Jan. 1, it's going to be costing more to do business -- and it has little to do with expanding his company.

Murphy has just finished renewing health care coverage for his employees, and the total premium is going up by about 15 percent, starting Jan. 1. The renewal notice for his company's workers' compensation coverage is due any day now -- and he is expecting that to go up 7 or 8 percent, although with double- digit percentage hikes now the norm for his industry, it could be much more.

But what Murphy didn't know is that his electricity provider, Southern California Edison, has proposed raising its electric rates by up to 10 percent, starting Jan. 1.

"We've got a bigger facility now and we're using more power. And now you're telling me that Edison could raise its rates 5 percent or more?" Murphy asked. "I never factored that in. I tell you, that's going to hurt."

When taken together, the increases in workers' comp, health benefits and, possibly, electricity rates are poised to take quite a bite out of Aquafine's profits.

Murphy is lucky on one count, though. He will not be impacted by one other cost set to hit employers throughout the state on Jan. 1: a 50-cent increase in the hourly minimum wage, from $5.75 to $6.25. He pays his 95 workers considerably more than minimum wage.

But he doesn't feel fortunate.

"If these costs keep going up like this, it's going to reduce our profits. And down the road, we're going to have to look again at the numbers of employees we plan to hire," he said.

Murphy is far from alone. Jan. 1 is shaping up to be a day of reckoning for employers throughout the county and the state, thanks to an uncanny combination of laws and dysfunctional markets. Not only does the minimum-wage increase kick in, but for most employers, Jan. 1 is the day that workers' camp or health care policies -- or both -- renew. And, if approved by state regulators, it will also be the day that Edison kicks in its rate hike.

Higher labor costs

Taken together, these hikes will help push up the overall cost of labor, according to economist Esi Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University. In 1999, Adibi said, the total cost of labor nationwide rose an average of 3.8 percent. This year, the cost is expected to top 4 percent.

"When you add to that the higher cost of energy and utilities, the cost of doing business is definitely increasing when compared to what it was in 1998 and 1999," Adibi said.

The overall impact of these hikes is hard to gauge. That's because they are not hitting all businesses evenly. Some industries, like restaurants, will be hit hard by the Jan. 1 increase in the minimum wage, but not by workers' comp premium rate hikes. A roofing contractor, on the other hand, is likely to see his workers' comp premium soar, while his electrical bill may remain negligible.

Also, the workers' comp and health care premium hikes will be spread out over the coming year, although the single biggest block of renewals for these benefits traditionally comes with the beginning of the calendar year.

And then, of course, there is the question of how readily employers will be able to absorb all these additional costs. And that depends on the strength of the economic expansion in coming months. If the economy continues chugging along, then revenue growth might help offset much of these costs; but in a slowdown, employers would have to make painful decisions on how much to cut costs.

Victims of prosperity

Ironically, it is the economic expansion itself that has helped bring about these cost increases in the first place. With the economy humming along, more people than ever are working. And that means employers need to provide workers' comp benefits for those workers. Ditto for health care. And of course, with factories expanding and businesses growing ever more wired, employers are using more electricity than ever before.

Not to mention the fact that labor unions and other advocates for low-wage workers have used the booming economy to make their case for an increase in the state's minimum wage. Last month, they succeeded in convincing the state Industrial Welfare Commission to raise the minimum wage from $5.75 an hour to $6.75 an hour in two stages: 50 cents an hour as of Jan. 1, 2001 and another 50 cents an hour beginning Jan. 1, 2002.

Costs have spiraled out of control for workers' comp coverage and electricity. And health care costs threaten to do the same.

In the workers' comp market, insurance companies are making up for years of writing premiums at below cost -- a practice that left many of them in precarious financial condition. This past year, they jacked up premiums by an average of 20 percent -- going as high as doubling or tripling premiums for some accounts. For the coming year, state Insurance Commissioner Harry Low has recommended that insurers raise rates another 10 percent. However, many employers face much higher increases.

One such company is Robert H. Peterson Co., a City of Industry-based maker of gas fireplace logs.

"We're working on our workers' comp renewal right now, and it's harder than ever to find coverage," said company vice president Tad Corrin. "It looks like our rates are going to go up about 60 percent next year, even though our injury rate has remained constant."

Power problems

The electricity market is arguably even more dysfunctional. The state-mandated deregulation of the electricity industry -- which took effect in 1998 -- coincided with an intensifying shortage of power, as power use picked up throughout the state and power supplies became harder to get. When San Diego Gas & Electric customers became subject to a fully deregulated market this past summer, many saw their electric bills double, triple and even quadruple. The resulting backlash has thrown the entire deregulation plan into turmoil.

Meanwhile, the state's two other regulated utilities, Southern California Edison and Pacific Gas & Electric, have racked up billions of dollars in debt as they've been unable to increase the prices they charge customers despite having to pay much more to buy power on the wholesale market. Now, instead of zapping their customers all at once when they were to be fully deregulated in 2002, Edison and PG&E are seeking permission from the state Public Utilities Commission to start raising rates as early as this January. In its petition late last month, Edison said it wants to raise rates "less than 10 percent."

That's more bad news for Torrance-based The Print Network, which provides digital and traditional offset printing services.

"This past summer, we saw a 10-fold increase in peak-hour-usage prices from Edison, from 73 cents per kilowatt-hour in the summer of 1999 to $7.43 per kilowatt hour this year," said Marshall Perkins, the company's vice president of marketing. "That hit us really hard and has forced us to be more attentive to how much we use our air conditioning and other equipment. I don't know how we're going to be able to absorb another rate hike."

Health care costs, although hardly out of control, have begun to rise sharply also, as consumers demand more choice of doctors and expensive new medications. Nationwide, according to a recent survey by Hewitt Associates LLC, health care premiums rose an average of 9.4 percent in 2000 and are expected to rise between 10 and 13 percent for 2001.

For employers, the frustrating part of all this is that most of these market conditions lie outside their control.

"These things often can't be factored into company budgets in advance," said Ezunial "Ese" Burts, president and chief executive of the Los Angeles Area Chamber of Commerce. The big question, of course, is whether businesses will be able to pass on these costs to consumers or will have to eat them.

"With the strengthening world economy, producers are gaining some price power and may be able to pass on some of these higher costs to their customers," Adibi said. "But that's not necessarily the case for service industries, where local competition often offsets these inflationary pressures."